Diversification is a strategy for building safety nets for your funds when investing. Mature investors use this method to inject a level of resilience into their investment portfolio. A diversified portfolio is one where the investor’s funds are not concentrated within a single asset class to ensure they can keep making money in any kind of economic climate.
By allocating funds across several dissimilar asset classes, the investor can spread their risk. This guarantees that the performance of one asset class does not interfere with the performance of the other asset classes in the portfolio. Instead, the impact of negative events in one area is contained and prevented from affecting the entire portfolio.
When diversifying an investment portfolio, you may do it within a single asset class, such as when you buy stocks of companies of different sizes in several sectors. You may also diversify by investing across different asset classes, for instance, in stocks, bonds, and real estate. It is also possible to combine both methods to give more depth to your portfolio, according to UpkeepMedia.com.
If you are already diversifying your portfolio and have included real estate as one of the asset classes in your portfolio, this post is for you. This article will show you how to further strengthen your portfolio through a robust real estate investment strategy.
To diversify a real estate portfolio simply means avoiding homogeneity in the types of properties you buy. The investments can be distinguished by location, purpose, or risk. The differences between these approaches are explained below. But do note that the information below is just a snippet of how the concepts work. To use these methods effectively, consider working with a financial adviser.
You will be able to improve your income and your rate of capital appreciation by following these methods.
Real estate diversification by property categories or types
To diversify your real estate portfolio by category, you need to put your money into a combination of residential, commercial, or industrial properties.
· Residential properties
These serve a residential purpose and there are different property types within the category. The property types you could buy include duplexes, triplexes, fourplexes, apartment complexes, and condos. There is a fairly steady demand for these kinds of properties because people have to have a place to live.
The main source of income when investing in residential houses is rent from the tenants. Depending on the location and type of home, rental income from a residential property can be significant and steady.
Residential properties have shorter lease lengths than industrial or commercial properties, so there is a greater risk that the home will be vacant a few times in a year.
· Commercial properties
These buildings are used for business or commercial purposes. Examples include office buildings, hotels and resorts, strip malls, retail centers, shopping malls, restaurants, and healthcare facilities.
Commercial properties have higher income potential than residential properties. They also have longer lease lengths because most businesses want to avoid any disruptions to their operations and income.
The typical commercial lease will last 3-5 years and investors can look forward to years of rental income with no risk of vacancies. On the downside, buying a commercial property is a lot harder than buying a residential property as the cost is higher and mortgage terms are tougher.
· Industrial properties
Industrial properties are those categories of commercial properties that are used for manufacturing, production, storage, distribution, and research and development. They include factories, warehouses, self-storage facilities, data centers, flex spaces, truck terminals, and showrooms.
Industrial properties have even longer leases than commercial or residential properties; industrial tenants are often willing to agree to long leases of up to 10 years. Additionally, tenants often cover some of the property expenses.
Industrial properties offer a greater level of security for investors, but they require more startup capital. But the yield from them can be double that of residential properties.
Real estate diversification by geography
Since the characteristics of housing markets vary according to their location, investors can also diversify by being simultaneously active in several housing markets. Diversification by geography can be done on a country, city, or regional level.
At the highest level, investors can diversify by buying real estate in different countries. On the city level, diversification is done by buying properties in different cities within the same country. Lastly, when diversifying at a regional level you invest in properties across the different regions of a single city.
Real estate diversification by risk
The last method for diversifying a real estate portfolio is selecting properties based on their risk profile. Instead of choosing properties according to asset type or location, the goal is to strike a balance between low-risk investments and riskier investments.
For instance, an investor might buy properties with high potential for appreciation but low income-generating capacity and offset them by buying other properties with high-income generating potential but limited prospects for value appreciation.
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